Pound Sterling Suffers Further Losses against Euro and Dollar thanks to Renewed Market Rout

- GBP softens again as global markets back in the driving seat
- 36,188 new daily cases of covid-19 reported in U.S. on Wednesday
- Expect markets to remain nervous
- GBP likely to maintain soft tone

Pound Sterling

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  • GBP/USD spot: 1.2417 | GBP/EUR spot: 1.1039
  • Bank transfer indicative guide for GBP/USD: 1.2170 and GBP/EUR: 1.0830
  • Best retail rates for GBP/USD: 1.2305 and GBP/EUR: 1.0940
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The British Pound dropped further against the Euro, Dollar, Yen and Franc over the course of the past 24 hours as markets suffered a classic case of 'risk off' nerves, the near-term outlook for the currency therefore likely rests with where markets move over coming hours and days.

The Pound fell by a third of a percent against the Euro and 0.70% against the U.S. Dollar as global stock markets fell and volatility rose sharply amidst renewed investor fears over shut downs being reintroduced in the U.S., amidst high infection rates of covid-19. The Pound-to-Euro exchange rate is trading at 1.1039 at the time of writing, the Pound-Dollar exchange rate is at 1.2420.

Adding to the negative market sentiment, the U.S. announced a fresh tranche of import tariffs on goods from the EU as President Donald Trump looked set to maintain his 'America First' policy heading into the November Presidential election which could mean yet further anxieties for markets to navigate over coming weeks and months.

"We are also seeing relations between the U.S. and EU sour, with threats of another bout of US tariffs coming amid the ongoing battle around aircraft subsidies. Coming at a particularly difficult time for markets, this breakdown in relations provides another reason for traders to be cautious about the forthcoming period," says Joshua Mahony, Senior Market Analyst at IG.

The backdrop matters as when market volatility is up (measured by the VIX index), the Pound tends to decline against the Euro, Dollar, Yen and Franc but tends to be better supported against the Australian Dollar, New Zealand Dollar and emerging market currencies.

"EUR/GBP is positively correlated with the VIX, so that on a risk-on morning when equities are up, the VIX is down and the birds are chirping away in the garden, EUR/GBP is likely to be lower and GBP/USD higher, but it probably won’t have anything to do with Brexit at all," says Kit Juckes, Global Head of FX Strategy at Société Générale.

With the Pound's correlation with volatility intact, it is little wonder it is struggling amidst news that newly diagnosed cases of covid-19 continues to soar in 'hot spot' states in the U.S., leading officials to consider slowing or reversing reopening plans.

Cases are surging in Texas, Florida, Arizona and in California. On Wednesday, Florida reported 109K covid-19 cases, up 5.3%, on the previous day, compared with an average increase of 3.7% in the previous seven days. Hospitalisations rose by 256, or 1.9%, to 13,574, the biggest single-day increase in a month. It is believed the Houston area could see its ICU places reach full capacity by today.

Renewed lockdowns, even if localised, would slow the pace of economic recovery in the U.S. and is therefore ultimately weighing on investor sentiment.

"Coming off the back of a huge market recovery in the months following the March low, we are finally seeing markets wake up to the obvious risks of getting too carried away at the first sign of a recovery," says Mahony. "The rising hospitalisation numbers across states such as Texas and Arizona are seeing traders disregard Trumps comments that a second wave of lockdowns are off the table."

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The British Pound is currently trading according to three different drivers at present: 1) broader market sentiment, 2) Bank of England policy and 3) Brexit trade negotiations.

The currency is one of the worst performing in the G10 group of currencies for the past month, suggesting that neither of the three drivers identified above are proving particularly supportive.

Pound is one of worst performing majors

Above: Sterling's relative performance over the past month

With Bank of England and Brexit trade headlines taking something of a backseat this week it is understandable that there is more focus on the broader market place and unfortunately for those readers looking for a stronger Pound, the markets remain skittish.

Looking at global equity markets on Thursday, Asia played catch-up with Europe and the U.S. overnight and fell into the red and the opening of European markets has fuelled the sell-off with the region's main bourses down by over a percent. U.S. futures markets are meanwhile indicating that the U.S. will likely also see further declines.

Expect traders to maintain focus on the evolution of the covid-19 pandemic in the U.S. as it has been confirmed the world's largest economy set records for infections and hospitalizations on Wednesday, with one report suggesting the disease is now predicted to kill 180K Americans by October.

The U.S. reported 36,188 new daily cases Wednesday, meaning it is once again approaching an all-time high for daily new cases which was set on April 24 in New York.

"Suddenly the virus matters again. Or so it would seem, with stock markets discovering that, yes, they too can go down – as U.S. infection numbers continue to go up and up," says Michael Every, Global Strategist at Rabobank. "We are all still hanging our hopes on a vaccine, which is where we have been since day one."

While market sentiment is poor, there are two issues to consider that suggest maybe the sell-off will ultimately be limited: 1) a nationwide shutdown of the U.S. is unlikely, instead we could see cities, counties or states shut down. This should ultimately settle investors. 2) central banks are maintaining significant stimulus measures.

"Even before the current upswing in Covid-19 cases, the Fed sounded open to further stimulus. This should ultimately weigh on the U.S. Dollar," says Sean Callow, an analyst with Westpac in Sydney. If this view transpires, we would expect Sterling to find support.

However, further short-term losses are still possible as the current developments must be priced by markets adequately.

"Short term, the dollar should benefit as disturbing virus headlines keep investors on edge, especially against a relentless drumbeat of US-China tensions. The trade deal may be officially still on track but every day seems to add to the angst between Washington and Beijing," says Callow.

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